Quick Takes: MXN Swaps – What’s new
===

Ali Curi: Hi everyone. And welcome to ION Markets Quick Takes. I'm Ali Curi and every week, along with my guests, Chris Barnes and Mark Bell, we take a quick dive into the headlines on the Clarus blog. 

Let's get started. Hi, Chris. Hi, Mark. 

Chris Barnes: Hey, Ali. How are you doing? 

Mark Bell: Hey, Ali. 

Ali Curi: Welcome gentlemen. Chris, let's start with you.

What is your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss? 

Chris Barnes: All right, this week we're going to be talking about MXNican swaps. The title of the blog is "MXN -Swaps — What's New?" And this is something I've really made a conscious decision this year in terms of the blog, is like forcing myself to look at these markets that I don't normally look at.

I have periodically blogged on MXNico in the past, but you know, I've done nearly 500 blogs now. When I look back at the history, I realize it's nearly five years since I last wrote about MXNican swaps. And so whilst I find that a little bit scary that I've even been blogging that long, a lot can happen in these markets.

It's one of those podcasts where I feel like, you know, I've never traded MXN swaps, but I have traded swaps. I've implemented swaps prices, therefore, I know how unusual MXN market conventions are, et cetera. So, I'm not approaching this as I'm an ex market participant. I know exactly what is happening in the MXN swaps market.

What I'm more approaching it from is, "This is the data that's out there. What can we learn about the MXN swaps market as a result of that?" For anyone who's not aware, why would I even bother looking at MXN swaps? Well, it's the eighth largest swaps market in the world. So it's a really, really significant market.

It's significant for us at Clarus as well. And for the podcast, because it's one of those few markets where LCH swap clear is not the market leader in terms of clearing of MXN swaps. I think that CME have something like a 98 percent market share in clearing of MXN. So whilst MXN swaps are cleared, they don't necessarily follow the same model as swaps like dollars and euros, et cetera.

Last time I looked at MXN, nearly five years ago, they were all traded against a term rate called a "TIIE." That term rate is, let's say somewhat famous or infamous amongst practitioners in the swaps market who have ever tried to build a swaps pricer, or who have ever tried to implement a swap from scratch in the system. Because, sometimes you're so used to normal swaps, let's say, which roll annually or have a day counts of 3360 or whatever.

The MXN market was famous for just throwing you. Because, for I have no idea why, it trades on a lunar calendar. So it trades on a 28 day calendar. And so in my head, like Mexico is basically associated with like three things; like big hats, the day of the dead and the lunar calendar. I'm not sure if there's a link between all three or what, but it's very strange.

And so I'm always interested in these intricacies and nuances of different markets. And so when I checked it out, I saw that actually the week that I was writing this blog was the same week that CME were converting all of these  TIIE swaps, which are a term rate, 28 days, to a new  F-TIIE, which is the risk free rate in MXNico.

So again, we're back into RFR world, a topic very, very close to the blog and this podcast. And there's a huge conversion exercise going through whereby trading and the legacy books are all going to transition at the same time to this new risk free rate,  F-TIIE, that simultaneously gets rid of the existing interest rate swaps market creates a new OIS market and silly old me, I thought, "Wow, the lunar calendar will be no more. And MXN will just be like any other currency, a big one, but any other currency." Nope, I was wrong. So the CME have done a great, great job in terms of the conversion exercise, in terms of transparency and setting it out, et cetera.

And when I wrote five years ago, F-TIIE had been announced, but there were no overnight index swaps traded against it. And so CME have published the conventions of these, of the OIS swaps as well. And lo and behold, they've decided to keep the 28 day calendar. It's great, gives us something to talk about on podcasts and stuff.

But why, Mexico? Why? I just don't know. So I've pleaded on the blog, I'm pleading now on the podcast. Can someone please tell me, what is it about the lunar calendar? Apart from that, I would say that the standout feature of MXN swaps is, and this is going to sound weird, but how standardized they are. They may have a strange calendar, but the rates of clearing are up there, like 95 percent of MXN swaps are cleared. The standardization in terms of tenors is right there. Like most things trade in two year, five year, 10 year, the adoption of SEF trading is really, really high. 80 percent of risk is traded on SEF. And what we've seen particularly noteworthy in, in SEF world is that TradeWeb, a dealer to client SEF, has now entered the MXN market as well.

And so whilst volumes in dealer to dealer world have increased and SEF usage has stayed the same, SEF usage is now encroaching into the client world. So MXN is a market that really likes this like standardized form of trading, clearing of execution of trade management. And yet, it still has a funny calendar.

Mark, apart from why does MXN trade against a lunar calendar? Have you got any specific question about the blog? 

Mark Bell: Thanks, Chris. Maybe I'm going to start with the 28 day convention, because I think that there is one upside to it. And that is that on the technology side, you don't need to set a role convention when generating cash flows, which makes it significantly easier from a technology perspective to be able to accurately generate the cash flows on those types of trades.

But maybe let me move on to the size of the market. As you mentioned in the blog, it's the eighth largest swaps market in the world. MXN is a deliverable currency, so there's no split between the offshore and the onshore market. South African Rand or ZAR is 10th in size and it's also deliverable. China is ninth in size and it's not deliverable.

Have you in your blogs ever actually looked at the impact of being a deliverable currency on the size of the swap market? 

Chris Barnes: It's a really puzzling question for me, I think. Because exactly as we talk about the difference between dollars and euros now, in that euros are a multi index currency, in theory, if you have onshore and offshore currencies, there's potential for a basis between that or a price difference that could in theory actually lead to inflated volumes, right?

But of course the general concept is if you want to have a globalized, developed, capital market, you need it to be as liquid as possible. Therefore you need to have as many participants active in it as possible. Therefore you need to have an offshore access model as well. CMY is obviously very complex in terms of that, in that you've got the CNH market in Hong Kong.

HKEX are doing some work on their swap connect as well to try and bring in a link between onshore liquidity and offshore liquidity. What we're looking at here are reported cleared volumes by CCPs. It's not necessarily the case that the CMY figures here represent the true kind of full size of how significant that swaps market is compared to other currencies.

For MXN, I would highlight how much it likes the standardization. You know, how much of the market has always been cleared? How much of the market has always executed on SEF? I don't know whether that's particularly a dynamic of the MXN market itself in terms of perhaps there are credit concerns over local entities or whether it's a facet of the data and we're seeing a lot of the hedge fund activity relative to the overall size of the MXN swaps market. 

So what I'm trying to say in a very long winded way there is that pulling out all of these nuances from these currencies, it's very difficult to answer actually a very specific question, over "are deliverable currencies naturally bigger than a non deliverable?"

I think it really varies on the currency, the jurisdiction, and the access to data for the onshore and offshore aspects of those markets. 

Mark Bell: I suppose that's something that our regulator clients are looking at when they look at this data that we publish out to the market. I think the next question really is just in terms of the wider market.

I think this South African rand is also going to an OIS swap market next year. Is there anything else that's going to be happening in the market next year that we can prepare for? 

Chris Barnes: So I have to admit, I've quite enjoyed the past 12 months of only blogging on risk free rates every quarter. I was super involved. I was really close to it. I studied ISDA fallbacks, got very excited about dollar LIBOR cessation, et cetera. But I think like a lot of market participants, I started to get jaded with it. You know, it felt like such a big thing and we're transitioning so many swaps and so much notional, et cetera.

And yet I think it's a real credit to the industry that we haven't had, so far, famous last words, any particular events to it. And so as a result, I have not stayed as on top of other markets moving. And so for example, MXN, I have to take my huge hat off and admit, I had no idea that there was a conversion exercise, but I think it's really, really helpful that we have the data and it's transparent because undoubtedly, just like the change of an index can cause operational hassles and stuff. And if someone like me isn't aware of it, and I'm a self professed geek, right?, there's a lot of market participants that don't know that this is going on. And hopefully the blog and the podcast serves its purpose in terms of bringing awareness. Ali, I think that's it for this week. Over to you. 

Ali Curi: Great, thank you, Chris. And please share with us again the title of your blog post. 

Chris Barnes: The title is "MXN Swaps – What’s New?" 

And what I can tell you is it's still on the lunar calendar, in case you didn't pick that up. 

Ali Curi: Great, that works. Chris Barnes, Mark Bell, thank you both for sharing your Quick Takes. 

Let's do it again next week.

Chris Barnes: Thanks, Ali. See you next week. 

Mark Bell: Thanks, Ali. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn.

Thank you for joining us.